Temperateness – avoiding hubris and believing your own hype

I cringed when I heard the opening line this morning in one of Sweden’s largest podcasts, Framgångspodden [Best of 2016, part 2, episode ‘105’]: “Mikael Syding, one of the greatest investors of all time”.

It’s a good thing I don’t believe my own hype. If I did, I would be reckless, thinking whatever the hedge fund manager of the decade does must be the right course of action.

The reason people like Buffett, Dalio and Soros keep outperforming decade after decade is that they take the task seriously, they exert themselves, they make sure they do all they can rather than relying on past success.

To be perfectly honest, I don’t understand how they do it. I myself have more or less regularly been struck by hubris several times over my career.

The first and possibly worst was recommending a 3D VR/AR company back in 1997-1998. It went bust not long after in the worst bankruptcy for a publicly listed company in Sweden in a long time.

I fooled myself with (half-assed it turned out) channel checks, calling or e-mailing reference clients (guess if the company supplied me with those references and if they were part-owned by the company and most likely complicit in the shady accounting practices that inflated reported sales and profits) in order to verify the company’s exponential growth and profits.

And when the warning signs appeared I ignored them, constantly looking for facts and arguments supporting my view of the company, defending my position instead of questioning it. It wasn’t consciously but I thought that since I was the one recommending the company, I was the one analyzing it, I was also the only one truly understanding its potential.

I was delusional: “I’m top ranked, I was the IPO moderator, I’ve made several successful recommendations over the last few years…”. At that point, I was a bull market ‘genius’ – especially regarding that specific company.

As I detail in “50 lessons I keep forgetting”, there was a regularity to my periods of hubris and recklessness:

Hard work sooner or later produced good results. The habit of working hard combined with stronger confidence and some luck often led to great results.

Great results made me slack off a little while earlier investment decisions, luck and trends kept producing gains, consequently giving me a God complex – that I couldn’t do anything wrong, that I was somehow suddenly superior.

Hubris led to not only less thoroughness it also made me increase the risk level, perhaps not at first, but if an investment went against me. Sooner or later, laziness, complacency and high risk caused losses, denial, anger, bargaining, depression and eventually acceptance so the cycle could start over with hard work and tight stop losses.

Temperateness

Just like bull markets, booms, manias and bubbles have sound beginnings, so does hubris. Hard, diligent work isn’t only on occasion rewarded with success. Exceptional results also tend to gradually boost your confidence, sometimes to the point of delusion of grandeur.

You are right to be confident, right to be happy and enjoy your winnings, but you are terribly wrong in thinking you can stop fighting for it.

Avoid hubris at all cost

Don’t allow yourself to become complacent after a lucky streak

Big wins are always part luck

and big losses often stem from overconfidence and gambling/speculation

You aren’t as good as you think

You still have to work hard for continued success

In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.

Temperateness means never being cocky; understanding a lucky streak is a lucky streak and not a permanent stroke of genius. It’s exactly because good decisions and good outcomes aren’t perfectly correlated on the stock market the adage “Everyone’s a genius in a bull market” exists.

For many, one aim of investing is to become financially independent, living off of the capital or at least passive income. One interpretation of that scenario is allowing oneself to relax, to slack off and “enjoy life”, often meaning “not working hard on the stock market”

Since that’s the endgame, relaxing ‘a little’ on the way there, in particular after a few wins, can seem warranted and well-deserved. And why not? You ‘obviously’ have a strong game, right?

Wrong.

The world’s fastest man needs to run at a 100% of capacity to win his races, and he still won’t be certain to win all of them. Just one per cent slower, i.e., at 99% of capacity he’ll be 10 hundreds of a second slower over the race, and could easily miss the silver and the bronze as well.

Even a good investor has as many losing trades as winning ones. Hence the margin of safety is typically quite thin. Consequently there is no significant room for complacency based on self-aggrandizement. By all means, take a pause to celebrate and reflect, but make it a real pause with zero investments – not a period of half-assedness and mediocrity.

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